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finding fraudulent conveyance action to be equitable because its subject matter was shares
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Civil Action NO: 01-1467, Bankruptcy Case No. 00-10992 through 00-10995, Adversary Proceeding No. 01-1155.
June 25, 2001
ORDER AND REASONS
Before the Court is the motion by the Asbestos Claimants Committee to withdraw the reference of a certain adversary proceeding pursuant to 28 U.S.C. § 157(d). For the following reasons, the motion is DENIED.
I. BACKGROUND
This motion to withdraw the reference involves a fraudulent conveyance action by the Asbestos Claimants Committee challenging five transactions in which the Debtor (BW) transferred assets to its parent Babcock Wilcox Investment Company (BWICO) on or after July 1, 1998. In the first transfer, the Debtor distributed to BWICO a non-interest bearing promissory note due to the Debtor from BWICO. In the second transfer, the Debtor distributed one hundred percent of the stock of its subsidiary Babcock Wilcox Tracy Power, Inc. to BWICO. In the three remaining transfers, the Debtor distributed one hundred percent of the stock of three operating subsidiaries, McDermott Technology, Inc., Hudson Products Corporation, and BWX Technologies, Inc. to BWICO. The ACC claims that it first learned of these transfers in July of 2000. The ACC also asserts that although the effect of the transfers on the Debtor's financial statements was a reduction of Debtor's assets by approximately $622 million, the true value of the assets may be considerably greater.
On November 13, 2000, the ACC made a formal demand on the Debtor either to obtain a voluntary return of the assets to the Debtor's estate or to institute an adversary proceeding seeking such a retransfer. ( See ACC's Mem. Supp. Mot. to Withdraw Reference Ex. A.) The Debtor promised to investigate the transfers and claimed that it was not necessary to file an adversary proceeding at that time. ( See Id.) The ACC responded on April 21, 2001 with a final demand upon the Debtor to institute legal action immediately with regard to the five transfers or the ACC would seek to bring the action on behalf of the Debtor's estate.
On April 30, 2001, BW responded by instituting an adversary proceeding in bankruptcy court for the Eastern District of Louisiana against defendants, BWICO, BWX Technologies, Inc., Babcock Wilcox Tracy Power, Inc., Hudson Products Corporation, and McDermott Technology, Inc. The proceeding was in the form of a declaratory judgment action seeking a declaration that Louisiana law applies to the case, a determination that the Debtor was solvent at the time of the 1998 transfers, and a determination that the transfers are not voidable. On May 14, 2001, the ACC asked the bankruptcy court for leave to intervene in the adversary proceeding and for authority to assert on behalf of the Debtor's estate an action to annul the allegedly fraudulent transfers and to return the transferred property to the Debtor's estate. The complaint in intervention included a jury demand. At the same time, the ACC moved to withdraw the reference on the proceeding to annul the transfers.
Before the motion to withdraw the reference could be heard in this Court, the bankruptcy court granted the ACC's motion to intervene to assert the revocatory claim, except that the Court directed the ACC to delete McDermott International as a defendant. The bankruptcy court did not explicitly rule that the ACC stood in the shoes of the Debtor in asserting this action, leaving some confusion as to the status of the ACC's revocatory action and the Debtor's declaratory action. The bankruptcy court then established a very aggressive schedule to resolve the choice-of-law issue and the issue of whether the debtor was solvent at the time of transfers. In the meantime, this Court held a hearing on the motion to withdraw the reference. Resolution of this motion boils down to whether the ACC is entitled to a jury trial on the fraudulent conveyance claim. Because, after careful study, the Court has determined that Seventh Amendment jury trial rights are not implicated here, the motion to withdraw the reference is denied.
II. DISCUSSION
A. Withdrawal of the Reference
The standard for when a district court may withdraw the reference from a bankruptcy court is outlined in Title 28, United States Code, Section 157(d). Section 157(d) provides for both mandatory and permissive withdrawal:
The district court may withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court], on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both Title 11 and other laws of the United States regulating organizations or other activities affecting interstate commerce.28 U.S.C. § 157(d).
Courts generally interpret this provision restrictively, granting mandatory withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law. See, e.g., Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D. La. 1993) (withdrawing reference when case necessarily involved a determination of antitrust claims); U.S. Gypsum Co. v. Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex. 1992) (withdrawing reference when case necessarily involved a determination of patent claims); In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986) (withdrawing reference when case necessarily involved a determination of Comprehensive Environmental Response Compensation and Liability Act issues); In re White Motor Corp., 42 B.R. 693, 704 (N.D. Ohio 1984) (no withdrawal of reference based on speculation about issues under Employee Retirement Income Security Act and Internal Revenue Code which may or may not be germane to the core proceeding). The ACC does not seek mandatory withdrawal. Rather, it seeks permissive withdrawal under 28 U.S.C. § 157(d) "for cause shown."
1. Permissive Withdrawal
The Fifth Circuit has held that in determining whether to withdraw the reference for cause shown, district courts should consider whether the matter at issue is a core or a non-core proceeding. See Holland America Ins. Co. v. Succession of Shepherd J. Roy, 777 F.2d 992, 999 (5th Cir. 1985). See also In re Babcock Wilcox Co., 2000 WL 422372, *3 (E.D. La. April 17, 2000). Additionally, courts should consider whether the proceedings involve a jury demand and whether withdrawal would further the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtor's and creditors' resources, and expediting the bankruptcy process. See id.
a. Nature of Proceeding
There is no question that a fraudulent conveyance action is a core proceeding. Section 157(b)(2)(H) of the Bankruptcy Code specifically provides that core proceedings include "proceedings to determine, avoid or recover fraudulent conveyances." 28 U.S.C. § 157(b)(2)(H); see Carlton v. Baww, Inc., 751 F.2d 781, 787-88 (5th Cir. 1985) (A proceeding . . . to void a fraudulent conveyance clearly "arises under Title 11"). Therefore, the Court finds this matter to be a core proceeding.
b. Demand for a Jury Trial
The ACC asserts that it is entitled to a jury trial under Granfinanciera v. Nordberg, 492 U.S. 33 (1989), in which the Supreme Court held that a person who has not submitted a claim against a bankruptcy estate has a jury trial right under the Seventh Amendment when he is sued by a bankruptcy trustee to recover a fraudulent monetary transfer. The ACC further asserts that the inability of the bankruptcy court to hold a jury trial is a ground for a district court to withdraw the reference from a bankruptcy court. See 1 COLLIER ON BANKRUPTCY § 3.04[1][b] (15th ed. 1992). Debtor and defendants argue that the ACC is not entitled to a jury trial based on three contentions: (1) the ACC is not the proper party to assert the right to a trial by jury; (2) the claim brought by ACC is equitable in nature; and (3) the ACC has submitted its claim to the equity jurisdiction of the bankruptcy court thereby converting the action to an equitable proceeding.
1) The Posture of the ACC First, Debtor argues that under bankruptcy law, the fraudulent conveyance claim belongs to the debtor-in-possession, which has the same powers as a bankruptcy trustee. See 11 U.S.C. § 1107 (a) ("a debtor in possession shall have all the rights and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this chapter."); In re CompuAdd Corp., 137 F.3d 880, 802-03 (5th Cir. 1998). Section 544(b)(1) of the Bankruptcy Code grants the trustee power to avoid a transfer by the debtor that is voidable under applicable law:
[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable under section 502(e) of this title.11 U.S.C. § 544 (b)(1). Nevertheless, the Fifth Circuit has recognized that in appropriate cases, a creditors' committee has standing to file suit on behalf of a debtor-in-possession or a trustee. Specifically, the Fifth Circuit has held that a creditor has standing to bring suit in place of the debtor-inpossession when: (1) the claim in question is colorable; (2) the debtor unjustifiably refused to pursue it; and (3) the creditor obtains leave of the court prior to instituting suit. See Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233, 247 (5th Cir. 1988). see also In re Mortgage America, 831 F.2d 97, 98 (5th Cir. 1987) (creditors' committee may, in some circumstances, have right to initiate avoidance action).
Defendants argue that the Supreme Court's recent decision in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942 (2000), does not bode well for the ACC's authority to assert a fraudulent conveyance claim on behalf of the debtor's estate and calls Louisiana World Exposition into question. The Court disagrees. Hartford Underwriters held that the Bankruptcy Code does not provide an administrative claimant an independent right to recover the costs of preserving collateral of the debtor's estate under 11 U.S.C. § 506(c). The Court found that the statute authorized only a trustee to recover such costs. The Court specifically noted that it did not address the validity of the practice of allowing other interested parties to act in the trustee's place when the trustee refuses to bring an action the Code authorizes only the trustee to bring. The Court said that Hartford was not analogous because there the petitioner did not ask the trustee to pursue payment and did not seek permission from the bankruptcy court to assert the action in the trustee's place. See id. at 13 n. 5, 120 S.Ct. 1951 n. 5.
Here, the parties dispute whether the bankruptcy court allowed the ACC to proceed on behalf of the estate in this action. Since the bankruptcy court allowed the ACC to file a complaint-in-intervention as the "plaintiff-intervener, "and the complaint asserts a revocatory action, a claim that belongs to the estate, it would appear that the bankruptcy court intended to allow the ACC to proceed in place of the debtor-in-possession. In any event, the Court believes that the Louisiana World Exposition factors are clearly satisfied in this case. As pled, the claim is colorable. Further, in November 2000 and April 2001, counsel for the ACC demanded that the Debtor obtain the return of the assets in issue or institute legal action to obtain their recovery. ( See ACC's Mem. Supp. Mot. to Withdraw Reference Exs. A C ). In response, the Debtor did not file a revocatory action to secure the return of the assets but instead filed the opposite, an action seeking a declaration of the Debtor's solvency and that the transfers were not voidable. The Court finds that the Debtor's action constitutes an unjustifiable refusal to seek the relief demanded. Further, the Court finds Debtor's arguments that it used its business judgment in deciding to proceed as it did totally unpersuasive. The Debtor has no incentive to avoid the transfers it made itself to its parent company; nor is it interested in probing the issue of its solvency in 1998. Further, its argument that its declaratory action is somehow better for the estate than a "full blown" avoidance action falls flat. The Court fails to see how the ACC's revocatory claim would be any more time consuming or costly, and, if successful, it would significantly enlarge the estate. Further, Debtors threat that its affiliates may cut off financial support if the ACC sues to revoke the transfers is just that. If the affiliates' continued support is predicated on the Debtor's protection of them in a friend-of-the-family suit, then this only highlights the reason that the creditors should bring the action. In addition, the Debtor fails to explain how the ACC's suit would harm its parent's relationship with the U.S. Navy, while its own declaratory action would not, unless it knows in advance that it will be declared to have been solvent in 1998. In any event, the debtor is duty bound to maximize the value of the estate, not to advance the separate business interests of its parent. Finally, debtor's argument that the transfers may not have any real value is undermined by the extent of the resistance to returning them.
In Louisiana World Exposition, the Fifth Circuit said that the test for unjustified refusal is whether "the interests of creditors were left unprotected." Louisiana World Exposition, 858 F.2d at 252 n. 20. Since the debtor's suit was designed to thwart a revocatory claim rather than to assert one, and the cause of action could be worth $622 million or more to the estate, the Court finds the debtor's refusal to assert it unjustified. Accordingly, the ACC is entitled to assert a revocatory action on behalf of the debtor's estate, and the Court rejects debtor's assertion that the ACC is not entitled to assert whatever jury trial rights attach to this claim.
2) Legal v. Equitable Proceeding
The debtor's next contention is that regardless of who asserts the fraudulent conveyance claim, it is equitable in nature and not subject to a jury trial. In Granfinanciera v. Nordberg, 492 U.S. 33, 42, 109 S.Ct. 2782, 2790 (1989), the United States Supreme Court set out a three-part test to determine whether a party is entitled to a jury trial. First, courts must determine if the action is of the type that would have been brought at law in eighteenth century England before the merger of law and equity. See id. Next, courts examine the remedy sought and determine whether it is legal or equitable in nature. See id. The inquiry into the nature of the remedy is more important than the analysis of the nature of the claim. Id. If, on balance, these two factors indicate that a jury trial is called for under the Seventh Amendment, the court must decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as a factfinder. See id.
Granfinanci era dealt with a fraudulent conveyance claim involving transfers of specific and determinate amounts of money. See id. at 36, 109 S.Ct. 2786. The Court found that such an action would have been an action at law in eighteenth century England. See id. Notably, the Court distinguished actions to recover fraudulent transfers of tangible property from those to recover intangible property:
If the subject matter is a chattel, and is still in the grantee's possession, an action in trover or replevin would be the trustee's remedy; and if the fraudulent transfer was of cash, the trustee's action would be for money had and received. Such actions at law are as available to the trustee today as they were in the English courts of long ago. If, on the other hand, the subject matter is land or an intangible, or the trustee needs equitable aid for an accounting or the like, he may invoke the equitable process, and that also is beyond dispute.Id. at 44, 109 S.Ct. at 2791. (citing 1 G. GLENN, FRAUDULENT CONVEYANCES AND PREFERENCES § 98, pp. 183-184 (rev. ed. 1940)) (emphasis added). Thus, whether an action for fraudulent conveyance requires a jury trial depends upon the subject matter of the action. See In re Term Industries, Inc., 181 B.R. 31, 32 (Bankr. S.D.N.Y. 1995). An intangible is defined as "such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as a certificate of stock." Id. at 33 (quoting BLACK'S LAW DICTIONARY (6th ed. 1991)). In In re Term Industries, the court found that a creditors' fraudulent conveyance action was equitable because "its subject matter [was] shares of stock, an intangible." See id. at 33; see also Bennett v. Genoa AG Center, Inc., 154 B.R. 126, 136 (Bankr. N.D.N.Y. 1992) (no right to jury when relief sought was the recission of foreclosure sale and reconveyance of property); In re Stocks, 137 B.R. 516, 522 (Bankr. N.D. Fl. 1991) (action was equitable when court was asked to determine whether forty percent of the interest in plaintiff was property of the bankruptcy estate and to void the transfer of interest from plaintiff)
The ACC seeks to avoid the transfer of assets that are intangible in nature. The assets at issue are the stock of BW's former subsidiaries (BWX Technologies, Hudson Products Corporation, McDermott Technologies, Inc. and BW Tracy Power) and a promissory note from BWICO. Stock and notes are intangibles. Hence, this is the type of fraudulent conveyance action that would have required a court of equity in eighteenth century England.
Further, the relief sought is equitable. The ACC seeks an order returning intangible assets. ( See ACC's Mem. Supp. Mot. to Withdraw Reference Ex. A.) In seeking to have the Court order BWICO to divest itself of the stock of the former BW operating subsidiaries and of the note, the ACC seeks relief in the nature of recission and/or divestiture, both of which are equitable remedies. See United States v. DuPont de Nemours Co., 366 U.S. 316, 326, 81 S.Ct. 1243, 1250 (1961) ("Divestiture itself is an equitable remedy."); Kline Hotel Partners v. Aircoa Equity Interests, Inc., 729 F. Supp. 740, 744 (D. Col. 1990) ( citing Pioneer Prop., Inc. v. Martin, 776 F.2d 888, 892 (10th Cir. 1985); Rachbach v. Cogswell, 547 F.2d 502, 505 (10th Cir. 1976); Royal Am. Managers, Inc. v. I.R.C. Holding Corp., 885 F.2d 1011,
1019 n. 4 (2d Cir. 1989); Arber v. Essex Wire Corp., 490 F.2d 414, 421 (6th Cir.), cert. denied, 419 U.S. 830, 95 S.Ct. 53 (1974); Dollar Sys., Inc. v. Avcar Leasing Sys. Inc., 890 F.2d 165 (9th Cir. 1989)) (recognizing that rescission is equitable in nature and no right to a jury attaches to such actions); see also In re Term Industries, 181 B.R. at 33 (action seeking avoidance of stock transfers; no jury trial). Further, the ACC's request for alternative monetary relief in an amount equal to the value of the assets does not convert the claim to one in law. See Resolution Trust Co. v. Pasquariello, 16 F.3d 525, 528-30 (3d Cir. 1994) (refusing mandamus on denial of jury trial when plaintiffs sought to recover real property or, alternatively, the value of the property); see also Whitlock v. Hause, 694 F.2d 861, 865 (1st Cir. 1982) (finding no jury trial right when trustee sought to avoid conveyance and reconvey property or alternatively to order debtor to pay damages). Unlike Granfinanciera, this case does not involve a determinate sum of money, and the ACC concedes that it does not know the value of the intangible assets. As in Whitlock v. Hause, 694 F.2d 861 (15t Cir. 1982), in which the First Circuit found no jury trial right, the ACC's claim is for the assets themselves, and its request for their monetary value would "take effect only if the earlier requested equitable relief of reconveyance was unavailable." Whitlock, 694 F.2d at 865. The Court in Whitlock acknowledged that the Supreme Court in Dairy Queen v. Wood, 369 U.S. 469, 82 S.Ct. 894 (1962), rejected the view that "the right to trial by jury may be lost as to legal issues where those issues are "incidental' to equitable issues." Id. at 866. But the Whitlock court noted that the Dairy Queen statement applied to a claim to which a jury trial right traditionally applied and did not refer to mere alternative prayers for relief arising from a wholly equitable framework. See id. Further, the Fifth Circuit has recognized that there may be situations in which awards of monetary relief are equitable remedies. See In re Jensen, 946 F.2d 369, 372 (5th Cir. 1991) Finally, in Granfinanciera, the Supreme Court stated that courts were to determine whether "on balance" the nature of the claim and the nature of the relief sought pointed to a jury trial. On balance, this Court finds that these factors do not indicate that jury trial rights are implicated here.
3) Waiver of Jury Trial Right or Conversion of the Claim
Lastly, the debtor and defendants argue that even if the ACC were entitled to a jury trial on the fraudulent transfer claim, it submitted to the equitable jurisdiction of the bankruptcy court by filing claims against the estate in the bankruptcy.
The debtor and defendants also argue that the ACC waived its jury trial right by filing an intervention in the adversary proceeding before the bankruptcy court, rather than filing a lawsuit of its own in state court or in district court. The Court finds this waiver argument unpersuasive. The ACC simultaneously filed a motion to withdraw the reference on its complaint-in-intervention, which asserted a jury demand. This conduct did not amount to a waiver.
The Court finds that in the peculiar posture of this case, the ACC has submitted to the equity jurisdiction of the bankruptcy court and that the claim is integral to the restructuring of debtor-creditor relations. The context of this case is totally different from Granfinanciera, on which the ACC relies. Granfinanciera involved a fraudulent conveyance action by a bankruptcy trustee against a third party which had not asserted a claim against the debtor's estate. At the time the action was brought, the debtor's plan of reorganization had already been approved by the bankruptcy court. As part of the plan, the trustee was vested with authority to pursue causes of action for fraudulent conveyances. The Court held that since the third parties had not filed claims against the estate, the trustee's fraudulent conveyance action did not arise "as part of the process of allowance and disallowance of claims, "nor was it "integral to the restructuring of debtor-creditor relations." 492 U.S. at 58, 109 S.Ct. at 2799. Indeed, the Court noted the adventitious relationship between the fraudulent conveyance action and the reorganization proceeding, pointing out that the suit had not been filed until well after the plan had been confirmed and "the debtor's assets and business had been liquidated." Id. at 60 n. 15, 109 S.Ct. at 2800 n. 15. The bankruptcy process was essentially over and done with.
The claim at issue does not fall under the Granfinanciera paradigm. This bankruptcy arises under a unique Bankruptcy Code provision that, upon confirmation of a plan, permits the Debtor to obtain an injunction channeling present and future asbestos claims to a trust and enjoining litigation of claims to be paid by the trust. See 11 U.S.C. § 524(g). The creditors who are asserting the fraudulent conveyance claim on behalf of the estate have filed thousands and will file thousands more asbestosrelated claims against the Debtor's estate. Cf. Langenkamp v. Culp, 498 U.S. 42 (1990) (no jury trial right when creditor against whom fraudulent conveyance claim is asserted has filed a claim against the estate). Further, this dispute is not adventitious to the reorganization. There is no confirmed plan of reorganization yet, and there likely will not be one until this issue is resolved. Moreover, the real conflict in the fraudulent conveyance action is between the ACC and the debtor and its affiliates, and it essentially involves how much money will be available to fund the trust. The debtor-in-possession does not want the assets in issue returned to the estate and subjected to the asbestos claims. Unlike Granfinanciera, this issue is integral to the restructuring of debtor-creditor relations. Furthermore, the key issue in the fraudulent conveyance action, whether BW was insolvent at the time of the transfers, involves valuing all of the then-asserted, as well as the future, asbestos personal injury claims. This same issue, i.e., the estimated value of the asbestos claims, is critical to the reorganization proceeding, albeit as of a later date. Indeed, the method by which the claims are valued is one of the most contentious issues in the reorganization. This Court therefore finds that the ACC submitted itself to the equitable jurisdiction of the bankruptcy court because it represents claimants against the estate. The Court further finds that the issues in the fraudulent conveyance action are integral to the restructuring of debtor-creditor relations. The Court further finds that debtor's affiliates have submitted themselves to the equitable jurisdiction of the bankruptcy court because the bankruptcy court granted them the benefit of the automatic stay, and they may be entitled to benefit from an injunction against future asbestos litigation if a plan is confirmed.
Finally, In re Jensen, relied on by the ACC, is no obstacle to the Court's conclusion that a jury trial is not called for here. Jensen did not involve an ongoing reorganization but arose in the context of a confirmed and consummated plan of reorganization. The plan gave the debtor-in-possession authority to prosecute existing claims of the estate. The debtors sued third parties in state court on various tort theories. The Fifth Circuit held that the debtors had a right to a jury trial on the state law claims. In that case, the debtor's claims were clearly adventitious to the reorganization, because a plan had already been confirmed and consummated. In contrast to the ACC's claim, the dispute was not between creditors and the debtor and its affiliates over how much money the creditors would get to divide up. It therefore was not integral to the restructuring of debtor-creditor relations. Jensen simply involved a suit on a prepetition tort claim against a third party who was not a creditor of the estate.
4) Other Factors
The Court finds that withdrawal of the reference would not further the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering economical use of debtor's resources and expediting the bankruptcy process. This fraudulent conveyance action is the stock-in-trade of the bankruptcy court, which is intimately familiar with issues involved in this complex bankruptcy. The bankruptcy court has put the case on a schedule to resolve the issue expeditiously. Withdrawal of the reference is simply not warranted here.
III. CONCLUSION
For the foregoing reasons, the Court DENIES ACC's motion to withdraw the reference from the bankruptcy court.